IPO Window – Unicorns and donkeys Pt II

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The best thing for Square would be to pull its IPO.

• The news that Square has again cut the price of its IPO serves as a severe warning that the IPO window is about to slam shut.
• Square, the US payments company and competitor to iZettle, is looking now to price its IPO at $9 per share giving a valuation of $4.1bn.
• This is 25% lower than was expected last week ($11-$13 per share) and 32% below the last round that was struck at $6bn.
• However, the investors in this last round are protected by a device called a ratchet.
• This means that if the IPO price is below that which was promised, these investors are issued extra shares to make up the difference.
• In this case an extra 10.3m shares costing other shareholders $93m will be issued to these investors who invested $150m and are guaranteed a 20% return.
• In my opinion this creates a conflict of interest as it is becoming clear that the best interests of the company would be served by pulling the IPO.
• This is for a number of reasons:
  • First. Sentiment is starting to turn against hugely valued start-up companies making it a bad time to sell shares. (see here)
  • Second: Square’s growth is slowing and it is not making money nor is it generating cash. Public companies tend to do better when they are profitable unless they are very fast growing.
  • Third: Square’s CEO is also the CEO of Twitter which is a far from ideal situation for either company (see here).
• Consequently, I think that the embarrassment of delaying the IPO is far outweighed by the benefit of waiting for a better time and getting the company into better shape before going public.
• The problem is that the investors in the latest round have no incentive to call off the IPO because as long as the shares don’t fall below $7.2 per share they will make money when the lock-up expires.
• With a bad IPO, Square will require a spectacular return to form in order to shift the stigma of its bad start and of this there is no sign.
• Unfortunately, I think that the IPO will be going ahead and hence, I am not optimistic with regards to its post-listing performance.
• This is likely to have a knock-on effect on private company valuations and expose a number of so-called unicorns for the donkeys they really are (see here).
• In the long-term a reset of valuations to realistic levels is a good idea but the journey to get there is always very painful.